By Chris Kuehl, managing director, Armada Corporate Intelligence
Rather suddenly, the threat of recession is back. Many had been predicting the downturn would occur as early as Q3 of last year. However, growth numbers consistently exceeded expectations (2.6% in Q3, 2.9% in Q4, 2.3% in Q1 of this year and another 2.3% in Q2). Then the biggest shock yet – growth in the third quarter of 4.9% (with Q4 estimates of 5.4%).
This does not mean that analysts are ready to dismiss the recession threat, and several factors are feeding this glum outlook. The impact of higher interest rates now is being felt, banks have been aggressively tightening credit standards, and inflation has ebbed but still is far too high for the Fed. Then, perhaps the most important development, there has been an outbreak of major strikes and threatened strikes, as well as a delay in the GOP naming a Speaker for the House of Representatives – a series of self-inflicted wounds that is carrying the overall economy off the proverbial cliff. The government was in total paralysis at a time when steps needed to be taken to keep the system functioning, and the threat of a shutdown now is greater than ever.
The last extended shutdown in 2019 cost the country $14 billion. All of this is convincing investors (stocks and bonds) to react. Treasury yields now are as high as they were during the last major recession, as the expectation is that interest rates will stay high.
The supply chain crisis has faded, but there still are issues. The majority of the business community has been very active in looking at alternative supplier nations and exploring extensive reshoring. These responses to the crisis have not been without challenges. India, Mexico and Vietnam have become popular alternatives to China, but India’s infrastructure is woefully inadequate, Mexico has seen massive levels of development but now has a worker shortage and still is affected by political decisions by the government of Andres Manuel Lopez Obrador (AMLO), and Vietnam is short of power generation and lacks modern workers. Reshoring in the US was worth a trillion dollars last year and three times that this year, but this is not a rapid process. Labor shortage is a factor, and so is having money to build out the capacity needed in machinery and technology.
The most vulnerable industries are those with complex networks – automotive and aerospace are the classic examples. The major assemblers rely on hundreds of intermediate suppliers, and any disruption in these will cascade through the entire network, as seen with the UAW strike. There still are lingering issues in the plastics sector, including a higher price of feedstock as oil prices rise.
One silver lining has a move toward greater diversity, which is dovetailing with the need to bring more control over the supply chain – and that promotes rapid domestic expansion. The key limiting factors in the US are very familiar by this point. At the top of the list is the availability of workers with the needed skills in the areas where the expansion is slated to take place. The second major barrier is financing. The construction sector had listed worker shortage and commodity costs as the number one and two problems as recently as six months ago, but now the availability of financing is at the top of that list – and by all accounts it is going to worsen before getting appreciably better.
Inflation has not increased to the levels previously seen. The latest report revealed that the core CPI, excluding food and energy, increased by 0.2% to 4.8% since the first of the year. The rate used by the Federal Reserve is Trimmed Mean Personal Consumption Expenditures (TMPCE), a more reliable measure than the Consumer Price Index. As of May 2023, the rolling 12-month trend was 3.9%, which is down significantly from this past spring. The drivers of inflation have changed in the last year as well – today, it is primarily driven by labor rates – as there have been declines in everything from commodity prices to logistics to producer prices. In recent weeks, there has been more commodity price acceleration and slightly less wage pressure.
The crucial issue as far as employment is concerned remains worker shortage. There are approximately six million people theoretically in search of work, but the vast majority of them are unskilled. There has been a slowdown in job offers, as companies have become frustrated with seeking people who just don’t seem to be available. The most common method for hiring has been poaching from other companies. Lately, more women have been entering the workforce again, but many of them still are demanding the opportunity to work remotely. The U-3 rate of unemployment remains historically low at 3.8%, and U-6 now is at 6.7%. The U-6 measure includes discouraged workers and involuntary part-time. There has been reluctance to engage in layoff activity as it has been so hard to find the appropriate employees, but that will change as pressure mounts.
Commodity prices have been, more or less, stable, but there have been short-term periods of volatility. The producers are looking ahead with some trepidation and worry that an economic slowdown will manifest in 2024 and affect demand. The pricing for copper, aluminum, nickel and others has been lower of late, but there is concern that production cuts will force these numbers back up by the start of next year. Oil has been very volatile as the OPEC+ nations are cutting production. The per barrel price is almost $15 higher than had been predicted, with WTI in the high 80s and Brent crude in the low 90s. US production has started to ramp up but will not make much of an impact for a few more months. The Hamas war has thrown the entire oil market into disarray. Thus far, prices have not moved much, but the World Bank has warned the war could escalate fast and drive prices as high as $130 per barrel.
Industrial production was up by 0.4% in the latest numbers. The manufacturing part of this data was up a meager 0.1%, almost entirely due to a shrinkage in auto-related production (down 5.0%). If the decline in automotive is pulled out of the data, there was growth of 0.6% in overall activity. The end of the UAW strike should be reflected in better numbers next month.
What does all this mean for 2024? It would be tempting to just assert there will be more volatility and leave it at that, but the lesson from the last year has been that the US economy has been remarkably resilient. The majority of that can be laid at the doorstep of a determined consumer. This is good news, but it also means that consumers are running up substantial debts to maintain that level. This could be the factor that drags growth down in 2024.
Chris Kuehl is managing director of Armada Corporate Intelligence. Armada executives function as trusted strategic advisers to business executives, merging fundamental roots in corporate intelligence gathering, economic forecasting and strategy development. Armada focuses on the market forces bearing down on organizations.
More information: www.armada-intel.com
